Iceland's President Explains Why The World Needs To Rethink Its Addiction To Finance

Here's the full transcript of our interview with Ólafur Ragnar Grímsson, who has been President of Iceland since 1996, and announced last month he would be running for a fifth term. Keep reading to hear his thoughts on Iceland's recovery, and how a large financial sector can ruin a nation.

How has life in Iceland changed since the meltdown?

It’s very difficult to give a short description of how life has changed. It’s absolutely clear in Iceland, like many other countries, the financial crisis came as a profound shock, not only to the financial institutions, but also to ordinary people, the economy...

So thousands of Icelanders had to struggle with fundamental change in their economic situation, loss of income, even loss of property, increased burden of loans, unemployment, and the nation as a whole also had to face -- which somehow we were fortunate to realize early on -- that the collapse of the banks was not just an economic or financial crisis, but also developed into a very profound political, social, and even judicial crisis.

Whereas in many other countries, until recent months, there was a tendency to read this, through 2008, 2009 into 2010, primarily as an economic and financial challenge. And I think one of the reasons Iceland has come out of this crisis earlier and more effectively than anyone could have expected, even ourselves, is that early on, we approached this not just with economic and financial challenge, but also attempted to deal with the profound profound social, political, and even judicial challenges, which the collapse of the bank brought about.

And during those final months of 2008 and the early weeks of 2009, what we saw here in Iceland was a fundamental threat to the political and social stability of the nation. Iceland is one of the most stable, open, and secure democracies you can find anywhere in the world.

How the financial system could pose a fundamental threat to the political and democratic framework of Iceland illustrates the grave political and social responsibility which the market and the financial sector carries, because if a collapse in the financial sector can bring one of the most stable and secure democracies and political structures to his knees, as happened in Iceland, what could it do in countries that have less stable democratic and political history?

So this journey in the last three years has not only been difficult for ordinary people, families, homes, many companies, but it has also been a profound learning experience for the nation, not just economically, but as I said before, politically and socially as well.

Do you look at Greece and wonder if they should be learning from the Icelandic model?

I have been very hesitant and reluctant to pass judgment on what other countries should do. I saw many misleading judgments made by people in other countries with respect to Iceland in recent years that I don’t think it is wise or fair for me to tell other countries what they should do.

But I think it is our obligation in Iceland to give an open and honest description of our own experience, of the lessons we have leaned, and other people can draw their own conclusions. I have already mentioned that if you want to deal with this economic crisis, you must treat it not only as an economic challenge but also as a fundamental social, political, and even a judicial challenge.

On the judicial side, we appointed a special commission headed by a Supreme Court judge that issued a report in 9 volumes, we appointed the office of special prosecutors, we have enacted various legislation and laws that relate to the judicial and legal system.

A second lesson, interestingly enough, is in terms of our economic policies. We have, to some extent, gone against the prevailing economic orthodoxies of the American, European, and IMF model in the last 30 years. This has even been recognized by the IMF leadership.

As you know, the IMF program finished last year, and we organized a celebratory conference in October, where we said goodbye to the IMF program, and it was attended by Paul Krugman, and other prominent economists, as well as some of the leading officials of the IMF. And it was very interesting to hear them acknowledge that the IMF had probably learned more from this experience with Iceland than Iceland had learned from the IMF. It has made the IMF reconsider some of their orthodox stances on what should be the proper economic and financial response to a crisis on this nature.

Thirdly, we have, in our economic measures, tried to protect the lowest income sectors, we have to try and protect some of the elementary social and health services, and done more of that nature than has traditionally been done in dealing with such a crisis.

As everybody knows now, we did not pump public money into the failed banks. We treated them like private companies that went bankrupt, and we let them fail. Some people say we did it because we didn’t have any other option, there is clearly something in that argument, but it does not change the fact that it turned out to be a wise move or whatever reason. Whereas in many other countries, the prevailing orthodoxy is you pump public money into banks and you make taxpayers responsible for the banks in the long run, and somehow treat the banks as if they are holier institutions in the economy than manufacturing companies, commercial companies, IT companies, or whatever. And I have never really understood the argument: why a private bank or financial fund is somehow holier for the well being and future of the economy than the industrial sector, the IT sector, the creative sector, or the manufacturing sector.

So if you add all of this together and throw in the devaluation of the currency as well, it’s clear that what some people have called the Icelandic model includes a number of measures and approaches that have not been adopted in other countries. On the contrary, it includes some methods in the process that go directly against what has been adopted in other countries. But the outcome is the Icelandic economy is recovering faster and more effectively than any other economy, including the British and the American that suffered from a big financial crisis in 2008.